European High Yield & Leveraged Loan Report

Transcription

1 European High Yield & Leveraged Loan Report Prepared in partnership with 212 Q1

2 Market Highlights and Commentary Leveraged Finance Overview European Leveraged Issuance by Type European Leveraged Issuance by Percentage European Leveraged Issuance Average Deal Size Bank Credit Standards Factors Affecting Bank Credit Standards Loan Demand Factors Affecting Loan Demand Global Comparison High Yield Issuance Issuance Leveraged Loans European Leveraged Loan Issuance By Loan Type European Leveraged Loan Issuance by Industry Sector Forward Pipeline of Leveraged Loan Market S&P ELLI Total Institutional Loans Outstanding S&P ELLI Ratings Diversification European Leveraged Loan Ratios Institutional and Pro Rata Spreads Mezzanine Spread Issuance High Yield Bonds Overview European HY Bond Issuance, Developed and Emerging Market European HY Bond Issuance, Sponsored vs. Corporate European Corporate Bonds ex Banks and Financials, Outstanding (EUR-Denominated Securities Only) European Corporate Bonds ex Banks and Financials, Average Deal Size (EUR-Denominated Securities Only) European Corporate Bond Issuance by Rating European Corporate Bond Issuance by Tenor European HY Use of Proceeds European HY Issuance, Senior Secured Share Issuance European Developed Market High Yield Bonds European Developed Market HY Bond Issuance European Developed Market HY Issuance by Currency European Developed Market HY Issuance by Industry European Developed Market HY Issuance by Country of Risk European Developed Market HY Issuance, Fixed vs. Floating European Developed Market HY Issuance, Sponsored vs. Corporate European Developed Market HY Rating Distribution at Issuance European Developed Market HY Bond Issuance Issuance European Emerging Market High Yield Bonds European Emerging Market HY Bond Issuance European Emerging Market HY Bond Issuance by Currency European Emerging Market HY Issuance by Industry European Emerging Market HY Issuance by Country of Risk European Emerging Market HY Issuance, Fixed vs. Floating European Emerging Market HY Issuance, Sponsored vs. Corporate European Emerging Market HY Rating Distribution at Issuance Emerging Market HY Bond Issuance Credit Quality European HY Default Rate European Loan Default Rate Developed Europe Issuer Rating Actions Emerging Europe Issuer Rating Actions Developed European Industry Rating Actions by $ Amount Emerging European Industry Rating Actions by $ Amount European Defaults Relative Value European HY Bonds, Cash vs. Synthetic European Leveraged Loans, Cash vs. Synthetic Total Return European HY Bond Total Return European Leveraged Loan Total Return Asset Class Total Return Annex...17 Disclaimer...2

3 European Leveraged Finance, First Quarter 212 Highlights and Market Environment Highlights European leveraged finance issuance (leveraged loans and high yield bonds) opened on a stronger note than in the last quarter of 211, with 45.5 billion issued in the first quarter of 212, a fourfold increase from Q4 11 ( 9.3 billion) and a 17.% increase from 1Q 11 ( 38.9 billion). The continued financial market strain from the sovereign debt crisis, weak macroeconomic backdrop, and bank capital ratio requirements continued to play out in the first quarter. Market share of high yield bond issuance was 41.1% in 1Q 12, compared to 39.7% in 4Q 11 and 54.1% in 1Q 11. Market and Economic Environment According to the January European Central Bank (ECB) bank lending survey, banks reported, on net, a further tightening of lending standards in the first quarter, both for small- and medium-sized enterprises (SMEs) and large enterprises. Standards for long-term loans tightened considerably more than short-term loans in the first quarter. The recessionary backdrop, negative industry outlooks, and bank capital requirements contributed greatly to tightened standards, while less important factors included bank liquidity positions, bank access to refinancing, and risk to collateral demanded. Factors that contributed to easing standards, albeit minor, were bank and non-bank competition, as well as market financing. More generally, however, loan demand plummeted in the first quarter, with loans primarily utilised to restructure debt. Factors contributing to decreased demand included fixed investments and mergers & acquisitions. While coordinated central bank actions alleviated funding pressures in banks in the fourth quarter of 211, Basel III rules, limited funding access, and bank capital raising needs have placed heavy constraints on bank lending. The need for European banks to raise 115 billion in additional capital has placed pressure on banks to rein in lending and subsequently access to balance sheet has been reduced, with further reductions expected in the next few months. Thomson Reuters noted that several European retail banks reduced amounts they are willing to take on deals by more than 5%. 1 Issuance Issuance: Leveraged Loans Leveraged loan issuance, which includes first lien, second lien, and mezzanine financing, totalled 26.8 billion in 1Q 12, a fourfold increase quarter-over-quarter (4Q 11 s issuance of 5.6 billion) and an increase of 5.2% from 1Q 11 ( 17.9 billion). According to S&P, the loan pipeline at the end of March 212 was an extremely light 33 million. Approximately.1 billion of second liens and.2 billion of mezzanine loans were issued in the first quarter. Pricing spreads for institutional loans widened by 24.7 basis points (bps), while pro rata loans tightened by.3 bps. Mezzanine loans tightened by 22.3 bps. The tiering of the loan markets continued to persist in the first quarter of 212, with corporates from higher quality sovereign countries enjoying cheaper access to the markets. Differences of more than 1 bps continue to persist between companies from higher rated sovereign countries (Germany, Netherlands), compared to companies from weaker sovereigns (France, Spain). Institutional Spreads Apr Mar Basis Points Widest difference (bps, right) France Germany Netherlands Spain United Kingdom Basis Points 2 Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 Apr-11 Oct-11, AFME, SIFMA According to Dealogic, the leading sectors in leveraged loan issuance for the first quarter were machinery ( 8. billion), followed by construction/building ( 5.3 billion), and computers & electronics ( 2.69 billion). The largest deal was a transaction from Schaeffler Technologies AG, an amend & extend ( A&E ) transaction on a 7.7 billion credit facility signed in August 29. Two-thirds of the deals by euro amount in the first quarter of 212 were A&E transactions; an additional 1% were private equity exits through secondary buyouts. The share of deals aimed to refinance and/or repay debt (inclusive of A&E deals) jumped to 74.3% in 1Q 12, compared to 47.4% in 4Q 11 and 45.2% in 1Q 11. The share of LBO/MBO deals remained unchanged from the previous quarter, at 23% Thomson Reuters, EuroLoanMarketPulse, 16 April Q1 212

4 7% 6% 5% 4% 3% 2% 1% % Deal Use as Euro Dollar Percentage of All Loans Issued 21:Q1-212:Q1 Percentage Amend and Extend Secondary Buyout Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q , AFME, SIFMA The primary CLO market remained quiet in the first quarter or 212, with the two deals completed retained (Cosmo Finance 212-1; Societa Italiana Per La Cartolarizzazione Dei CRE 212-1). SME issuance declined in the first quarter to 7.7 billion, a decline of 71.9% and 5.9%, respectively, quarter-over-quarter and year-overyear. The majority of deals were retained, with only 1. billion placed. European CLO outstandings, including SME deals, decreased 1.8% on an annualized basis in the first quarter, ending March 212 at 285. billion. Both non-sme CLO and SME CLOs shrank 7.% and 13.2%, respectively, in the first quarter of 212 on an annualized basis European CLO Outstanding 2:Q1-212:Q1 SME Non-SME CLO Source: AFME, SIFMA Issuance: High Yield Bonds Primary issuance in 1Q 12 totalled 18.1 billion on 39 deals, a fourfold increase quarter-over-quarter ( 3.7 billion) but a decrease of 11.% year-over-year ( 21.2 billion). The decrease year-over-year stemmed primarily from the decline in issuance from emerging market Europe, while developed market Europe continued to maintain issuance at levels seen last year. Primary issuance in developed markets Europe in the first quarter was 17.6 billion on 37 deals, while in emerging markets Europe primary issuance was 1.1 billion on 2 deals. Six new debut issues were brought to market in developed markets Europe: Welltec A/S; Schaeffler Finance; Lowell Group Financing, Talvivaara Mining Co, Numericable Finance & Co, and Viridian Group. In emerging markets Europe one payment-in-kind (PIK) deal emerged: Eileme 1. High yield issuance for refinancing and/or repayment of debt ticked up slightly in 1Q 12 to 48.% of all deals by euro amount, compared to 35.8% and 44.1%, respectively, quarter-over-quarter and year-over-year. Use of senior secured debt structures increased in 1Q 12 to 39.8% by euro amount, compared to 25.3% and 44.7%, respectively, quarter-over-quarter and year-overyear. Usage continues to remain predominantly from developed markets Europe; in the first quarter of 212, no emerging market deals were senior secured. Continuing the trend that emerged in the fourth quarter of 211, USD-denominated issuance in Europe, especially developed market Europe, continued to represent a larger share of European corporate issuance than prior years. While USD-denominated issuance has always been a mainstay in emerging markets Europe, USDdenominated issuance has traditionally represented only a fifth of high yield issuance in developed market Europe (1-year average of 22.1%). In the first quarter of 212, 39.8% of issuance was denominated in USD, compared to 48.1% in Q4 11 and 21.3% in 1Q 11. Other European debt markets saw a similar rise in USD-denominated issuance in 4Q 11 and 1Q 11, particularly public structured finance deals. Returns & Credit Quality European high yield led total returns in the first quarter, in part buoyed by a recovery of European corporate bonds more generally and a general selloff of equities. On a total return basis, high yield and leveraged loans returned 12.6% and 4.2%, respectively, quarter-overquarter. While Moody s expected increases to the default rate to remain moderate in 212, the rating agency noted that the reduction of exposure by banks could lead to a liquidity crisis for some weaker-performing companies. 2 With $325 billion in refinancing needs for the period and a greater proportion of B-rated names and unrated LBOs due in 213 and beyond, Moody s noted that B-rated companies would find it challenging to refinance their 213 maturities in time when competing against upcoming LBO maturities. 3 According to S&P, downgrades continued to exceed upgrades in both emerging and developed market Europe. In developed market Europe, the downgrade of several sovereigns in the first quarter drove the downgrade ratio upward, with 77 downgrades and 16 upgrades in 1Q 12. Both sovereigns and more particularly banks dominated downgrade headlines in the first quarter, with 4 downgrades stemming from bank downgrades (which, in turn, were impacted by sovereign downgrades). The few up- 2 Moody s. Liquidity will be diminished by sovereign and banking pressures, 3 April Moody s, Distressed Exchanges Likely to Remain Prominent in , 13 March Q1 212

5 grades were concentrated largely in the automotive and consumer products sectors. Emerging market Europe also received more downgrades than upgrades (3 downgrades to 1 upgrade), but remained relatively quiet. High yield bond default rates diverged between Moody s and S&P in the first quarter, with the former reporting a decline in default rates (2.3% in 1Q 12, compared to 3.% in 4Q 11) and the latter reporting a slight rise in default rates (2.3% in 1Q 12, compared to 1.6% in 4Q 11). Three defaults were reported by Moody s and Standard and Poor s: Petroplus Holdings, Yell Group, and ERC Ireland. 3 Q1 212

6 1. Leveraged Finance Overview 1.1. European Leveraged Issuance by Type 1.2. European Leveraged Issuance by Percentage 3 European Leveraged Issuance :Q1 1% European Leveraged Issuance :Q1 Percentage 25 2 Leveraged Loans Europe Developed HY Europe EM HY 9% 8% 7% 6% Leveraged Loans Europe Developed HY Europe EM HY 15 5% 1 4% 3% 5 2% 1% Q1 % Q1 Sources: Dealogic, Thomson Reuters LPC Sources: Dealogic, Thomson Reuters LPC 1.3. European Leveraged Issuance Average Deal Size 1.4. Bank Credit Standards European Leveraged Issuance Average Size :Q1 Leveraged Loans Europe Developed HY Europe EM HY Bank Credit Standards Apr Apr. 212 Net Percentage SME Large Enterprises Overall Q1 Sources: Dealogic, Thomson Reuters LPC -1-2 Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12 Source: ECB 1.5. Factors Affecting Bank Credit Standards Loan Demand 3 Factors Affecting Bank Credit Standards Apr. 212 Industry or Firm-Specific Outlook Expectations Regarding Economic Activity Costs to Bank Capital Position Risk on Collateral Demanded Bank Access to Market Financing Bank Liquidity Position Competition from Non-Banks Large Enterprises SME Market Financing Overall Net Percentage Source: ECB Loan Demand Apr Apr. 212 Net Percentage SME Large Enterprises Overall -5 Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12 Source: ECB 1 A positive net percentage number signifies tightening bank credit; a negative net percentage number signifies easing credit. 2 A positive net percentage signifies the factor contributed to tightening credit standards; a negative net percentage signifies the factor contributed to easing credit standards. 3 A positive net percentage signifies increased demand; a negative net percentage signifies decreased demand. 4 Q1 212

7 1.7. Factors Affecting Loan Demand 4 Factors Affecting Loan Demand Apr. 212 Debt Restructuring Loans from Other Banks Equity Issuance Loans from Non-Banks Debt Issuance Inventories, Working Capital Internal Financing M&A, Restruturing Fixed Investment Net Percentage Source: ECB 1.8. Global Comparison High Yield Issuance Prior Q1 Q2 Q3 Q4 Full Year Q1 Q2 Q3 Q4 Full Year 21 United States Asia Pacific Europe A positive net percentage signifies a factor that contributed to higher demand; a negative net percentage signifies a factor that contributed to lower demand. 5 Q1 212

8 2. Issuance Leveraged Loans 2.1. European Leveraged Loan Issuance By Loan Type Leveraged Loan Issuance by Loan Type :Q Q1 Mezzanine 2nd Lien 1st Lien, Thomson Reuters LPC 2.2. European Leveraged Loan Issuance by Industry Sector Leveraged Loan Issuance by Industry 212:Q1 Consumer Products Transportation Publishing Finance Oil & Gas Chemicals Professional Services Retail Forestry & Paper Healthcare Telecommunications Computers & Electronics Construction/Building Machinery EUR Billions Forward Pipeline of Leveraged Loan Market 2.4. S&P ELLI Total Institutional Loans Outstanding Forward Pipeline of Leveraged Loan Market 21:Q1-212:Q1 Europe US S&P ELLI Total Institutional Loans Outstanding :Q Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Source: Standard & Poor's LCD YTD Source: Standard & Poor's LCD 2.5. S&P ELLI Ratings Diversification 2.6. European Leveraged Loan Ratios S&P ELLI Ratings Diversification :Q1 Percentage NR Other B BB European Leveraged Loan Ratios 211:Q2 Debt/EBITDA BB- & Above B+ B B- CCC CC/C Source: Standard & Poor's LCD YTD is as of March 31, 212. Source: Fitch Ratings 5 Data from Fitch ratings are on a lag. 6 Q1 212

9 2.7. Institutional and Pro Rata Spreads 2.8. Mezzanine Spread 45 Institutional and Pro Rata Spreads Apr Mar. 212 Basis Points 12 Mezzanine Spread Apr Mar. 212 Basis Points 4 Institutional Pro Rata 11 Mezzanine Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 Apr-11 Oct-11, AFME, SIFMA 6 Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 Apr-11 Oct-11, AFME, SIFMA 7 Q1 212

10 3. Issuance High Yield Bonds Overview 3.1. European HY Bond Issuance, Developed and Emerging Market European HY Issuance, Developed and Emerging Markets :Q1 Europe Emerging HY Europe Developed HY Q1 # of Deals Sources: Dealogic, Thomson Reuters LPC 3.3. European Corporate Bonds ex Banks and Financials, Outstanding (EUR-Denominated Securities Only) European Corporate Bonds ex Banks and Financials, Outstanding (EUR-Denominated Securities Only) 212:Q European HY Bond Issuance, Sponsored vs. Corporate 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % European HY Issuance, Sponsored vs Corporate :Q1 Percentage Europe Corporate Europe LBO EM Corporate EM LBO Q1 Sources: Dealogic 3.4. European Corporate Bonds ex Banks and Financials, Average Deal Size (EUR-Denominated Securities Only) European Corporate Bonds ex Banks and Financials Outstanding, Average Size 212:Q1 7 Millions HY Only (excluding Non-Rated) Non-Rated IG Only IG Only Non-Rated HY Only (excluding Non-Rated) Sources: Bloomberg, AFME, SIFMA Sources: Bloomberg, AFME, SIFMA 3.5. European Corporate Bond Issuance by Rating 3.6. European Corporate Bond Issuance by Tenor 2. European HY Issuance by Rating 212:Q1 EUR Billions 14. European HY Issuance by Tenor 212:Q1 EUR Billions BB B CCC NA/NR Developed Emerging. <5 Years 5-7 Years 8-1 Years 1+ Years Other Sources: Bloomberg, Dealogic, Moody's, Standard and Poor's, Fitch Ratings Sources: Bloomberg, Dealogic, Moody's, Standard and Poor's, Fitch Ratings 8 Q1 212

11 3.7. European HY Use of Proceeds 3.8. European HY Issuance, Senior Secured Share 1% European HY Issuance By Use of Proceeds :Q1 6 European HY Issuance, Senior Secured and Unsecured :Q1 5% 9% 8% 7% 6% 5% 4% 3% 2% 1% Other Restructuring Repay Debt/Refinancing LBO/MBO General Corporate Purposes Acquisitions Other Senior Unsecured Senior Secured % Senior Secured (right) 45% 4% 35% 3% 25% 2% 15% 1% 5% % % Q Q1, AFME/SIFMA Sources: Bloomberg, Dealogic 4. Issuance European Developed Market High Yield Bonds 4.1. European Developed Market HY Bond Issuance 4.2. European Developed Market HY Issuance by Currency European Developed Market HY Bond Issuance :Q1 Europe Developed HY # of Deals (Right) Q1 # of Deals European Developed Market HY Issuance by Currency :Q Q1 Other USD GBP EUR 4.3. European Developed Market HY Issuance by Industry European Developed Market HY Issuance by Industry 212:Q1 Telecommunications Auto/Truck Machinery Healthcare Chemicals Construction/Building Holding Companies Professional Services Forestry & Paper Utility & Energy Oil & Gas Transportation Dining & Lodging Consumer Products Computers & Electronics Metal & Steel Finance Mining European Developed Market HY Issuance by Country of Risk European Developed Market HY Issuance by Country of Risk 212:Q1 United Kingdom Germany France Italy Switzerland Spain Sweden Finland Netherlands Ireland Belgium Denmark Austria Q1 212

12 4.5. European Developed Market HY Issuance, Fixed vs. Floating 4.6. European Developed Market HY Issuance, Sponsored vs. Corporate European Developed Market HY Bond Issuance, Fixed vs Floating :Q1 Floating Fixed European Developed Market HY Issuance, Sponsored vs Corporate :Q1 Europe LBO Europe Corporate Q Q European Developed Market HY Rating Distribution at Issuance 1% European Developed Market HY Rating Distrbution at Issuance 21:Q1-212:Q1 9% 8% 7% 6% 5% 4% 3% 2% 1% % NA/NR CCC B BB Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q , AFME/SIFMA 1 Q1 212

13 4.8. European Developed Market HY Bond Issuance Issuer Industry Group Date Currency Amount (Millions) Coupon Moodys S&P Fitch Wienerberger AG Construction/Building 13/1/212 EUR 2 5. Ba1 BB Fresenius Medical Care US Finance II Inc Healthcare 17/1/212 USD Ba2 BB USD Ba2 BB FMC Finance VIII SA Healthcare 18/1/212 EUR Ba2 BB BB Sable International Finance Ltd Telecommunications USD Ba2 BB Ardagh Packaging Finance plc Consumer Products 19/1/212 USD Ba3 USD B3 Taminco NV Chemicals 2/1/212 USD Caa1 B- Welltec A/S Oil & Gas 25/1/212 USD B1 BB- Nara Cable Funding Ltd Telecommunications 26/1/212 USD 1, B1 B CEVA Group plc Holding Companies 27/1/212 USD Ba3 B+ USD Caa2 B- UPCB Finance VI Ltd Telecommunications 31/1/212 USD Ba3 B+ Franz Haniel & Cie GmbH Holding Companies 1/2/212 EUR Ba1 BB+ Schaeffler Finance BV Machinery 2/2/212 EUR B1 B EUR B1 B USD B1 B USD B1 B INEOS Finance plc Chemicals 3/2/212 EUR 5 3M EURIBOR + 6 Ba3 B USD 1, Ba3 B Orange Communications SA Telecommunications CHF Ba3 BB- EUR 15 3M EURIBOR Ba3 BB- EUR B3 B- Numericable Finance & Co SCA Telecommunications 9/2/212 EUR B2 Orange Communications SA Telecommunications EUR 18 3M EURIBOR Ba3 BB- Verisure Holding AB Professional Services 1/2/212 EUR 1 3M EURIBOR + 65 B2 B B EUR Caa1 CCC+ CCC+ EUR B2 B Faurecia SA Auto/Truck 14/2/212 EUR Ba3 Fiat Finance & Trade Ltd SA Auto/Truck 16/2/212 CHF Ba3 BB BB CPUK Finance Ltd Dining & Lodging 17/2/212 GBP BB+ B+ Virgin Media Finance plc Telecommunications 28/2/212 USD Ba2 BB- BB+ Stora Enso Oyj Forestry & Paper 29/2/212 EUR Ba2 BB Afren plc Oil & Gas 1/3/212 USD B B Viridian Group Ltd Utility & Energy EUR B2 BB USD B2 BB Eco-Bat Finance plc Metal & Steel 2/3/212 EUR B1 B+ Gategroup Finance (Luxembourg) SA Transportation EUR B1 BB HeidelbergCement Finance BV Construction/Building EUR 3 4. Ba1 BB BB+ Renault SA Auto/Truck 12/3/212 EUR Ba1 BB+ Obrascon Huarte Lain SA - OHL Construction/Building 15/3/212 EUR Ba2 BB- BB- Fiat Finance & Trade Ltd SA Auto/Truck 2/3/212 EUR Ba3 BB BB Fresenius Finance BV Healthcare 21/3/212 EUR Ba1 BB+ Rexel SA Computers & Electronics USD Ba2 BB BB Jaguar Land Rover plc Auto/Truck 22/3/212 GBP B1 B+ BB- Lemminkainen Oyj Construction/Building 23/3/212 EUR 7 1. Lowell Group Financing plc Finance GBP B1 BB SPIE SA Construction/Building 28/3/212 EUR Caa1 CCC+ Talvivaara Mining Co Ltd Mining EUR PIK (Payment in Kind) Source: Bloomberg, Dealogic 11 Q1 212

14 5. Issuance European Emerging Market High Yield Bonds 5.1. European Emerging Market HY Bond Issuance 5.2. European Emerging Market HY Bond Issuance by Currency European Emerging Market HY Bond Issuance :Q1 # of Deals Europe Emerging HY # of Deals (Right) European Emerging Market HY Issuance by Currency :Q1 Other USD GBP EUR Q Q European Emerging Market HY Issuance by Industry European Emerging Market HY Issuance by Industry 212:Q European Emerging Market HY Issuance by Country of Risk European Emerging Market HY Issuance by Country of Risk 212:Q1 Telecommunications Poland European Emerging Market HY Issuance, Fixed vs. Floating European Emerging Market HY Bond Issuance, Fixed vs Floating :Q1 Floating Fixed 5.6. European Emerging Market HY Issuance, Sponsored vs. Corporate European Emerging Market HY Issuance, Sponsored vs Corporate :Q1 EM LBO EM Corporate Q Q1 12 Q1 212

15 5.7. European Emerging Market HY Rating Distribution at Issuance 1% European Emerging Market HY Rating Distrbution at Issuance 21:Q1-212:Q1 9% 8% 7% 6% 5% 4% 3% 2% 1% % NA/NR CCC B BB Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q , AFME/SIFMA 5.8. Emerging Market HY Bond Issuance Issuer Industry Group Date Currency Amount (Millions) Coupon Moodys S&P Fitch Eileme 2 AB Telecommunications 19/1/212 EUR B3 B- USD B3 B- Eileme 1 AB Telecommunications 9/2/212 USD Caa1 B- PIK (Payment in Kind) Source: Bloomberg, Dealogic 13 Q1 212

16 6. Credit Quality 6.1. European HY Default Rate 6.2. European Loan Default Rate European HY Default Rate (LTM) Apr Mar. 212 Percent S&P Moody's European Loan Default Rate (LTM) 26:Q1-211:Q2 Percent Senior Leveraged Loans (Adjusted for CC*/C*) Senior Leveraged Loan Default Rate (Unadjusted) Mezzanine Loan (Adjusted for CC*/C*) Mezzanine Loan Default (Unadjusted) Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: Standard & Poor's. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Source: Fitch Ratings 6.3. Developed Europe Issuer Rating Actions Emerging Europe Issuer Rating Actions 3 S&P Developed Europe Issuer Rating Actions :Q1 25 # Of Issuers Upgrades Downgrades 2 Downgrade/Upgrade Ratio (Right) 1% 9% 8% 7% S&P Emerging Europe Issuer Rating Actions :Q1 25 # Of Issuers Upgrades Downgrades 2 Downgrade/Upgrade Ratio (Right) 1% 9% 8% 7% 15 6% 15 6% 5% 5% 1 4% 1 4% 3% 3% 5 2% 5 2% 1% 1% Q1 % Q1 % Source: Standard & Poor's Source: Standard & Poor's 6.5. Developed European Industry Rating Actions by $ Amount S&P Developed Europe Issuer Rating Actions by $ Amount ex Sovereign & Banks 212:Q1 Media and Entertainment Healthcare Forest Products and Building Materials Consumer Products Chemicals, Packaging and Environmental Services Automotive Capital Goods Oil and Gas Exporation and Production High Technology Finance Companies Retail/Restaurants Telecommunications Insurance Transportation Utility Downgrades Upgrades -2, -15, -1, -5, 5, 1, Source: Standard & Poor's USD Millions 6.6. Emerging European Industry Rating Actions by $ Amount S&P Emerging Europe Issuer Rating Actions by $ Amount ex Sovereign & Banks 212:Q1 Transportation Downgrades Upgrades USD Millions Source: Standard & Poor's 1 Data from Fitch Ratings are on a lag. 2 Numbers include both corporate and sovereigns. 3 Numbers include both corporate and sovereigns. 14 Q1 212

17 6.7. European Defaults Issuer Industry Group Country Date Reported By Reason Petroplus Holdings AG Oil & Gas Switzerland January 212 Moody's/S&P Bankruptcy Yell Group PLC Media & Entertainment United Kingdom January 212 Moody's/S&P Distressed Exchange ERC Ireland Preferred Equity Telecommunications Ireland February 212 Moody's/S&P Missed Coupon Source: Moody's, Standard & Poor's 15 Q1 212

18 7. Relative Value 7.1. European HY Bonds, Cash vs. Synthetic 7.2. European Leveraged Loans, Cash vs. Synthetic 1 Bonds, Cash vs. Synthetic Apr Mar. 212 Basis Points HY Spread iboxx EUR HY itraxx XO 5Y Apr-1 Oct-1 Apr-11 Oct-11 Sources: Markit Loans, Cash vs. Synthetic Apr Mar. 212 Price/Bid LL Spread LevX Senior Euro Lev Top 4 8. Apr-1 Oct-1 Apr-11 Oct Sources: Thomson Reuters LPC, Markit 8. Total Return 8.1. European HY Bond Total Return 8.2. European Leveraged Loan Total Return European High Yield Total Return :Q1 Percentage European Leveraged Loan Total Return :Q1 Percentage ELLI ELLI (EUR-denominated only) Q Q1 Source: Bank of America-Merrill Lynch Source: Standard and Poor's LCD ELLI EUR-denominated only unavailable for 23 and Asset Class Total Return Asset Class Total Returns 211:Q1 v 212:Q1 MCSI EM Russell 2 S&P 5 U.S. Treasuries U.S. Mortgages 3Y EMU ABS/MBS U.S. ABS/MBS U.S. Municipal U.S. Corporates S&P ELLI EMU Covered Bonds U.S. HY EMU Financial Corporates Global Fallen Angel HY U.S. HY Distressed Euro HY BB rated Euro High Yield Euro HY B Rated Euro Fallen Angel HY Euro HY CCC and Lower Rated Q1 212 Q Percentage Source: BofA-ML, Bloomberg 16 Q1 212

19 Summary of the Methodologies Adopted for this Report 1. Leveraged Issuance Overview Leveraged Loans and High Yield Bonds Leveraged loan data are sourced from Thomson Reuters LPC and Dealogic. Leveraged loan data from Thomson Reuters LPC are defined primarily as having sub-investment grade ratings and/or a margin spread minimum of 2 basis points (spread minimums will vary from year to year to make Thomson LPC s cutoff). Leveraged loan aggregates will include first lien, second lien, and mezzanine financing. Discrepancies in Thomson Reuters LPC data are due to rounding and/or currency rate of exchange. Leveraged loan data from Dealogic are defined primarily as coming from a leveraged or highly leveraged European deal; loan tranches must have sub-investment grade ratings, or, if unrated, a margin spread minimum of 125 basis points over a benchmark (e.g., Euribor, LIBOR). Under these guidelines, subinvestment grade-rated loans with a margin spread of less than 125 basis points are included. Deals must be European and are inclusive of both developed and emerging market Europe as defined in high yield criteria in Section 3. Deals must also be marketed either in Europe or in the United States. Loans not EURdenominated are converted to EUR as of credit date for purposes of aggregation. Aggregates include new money as well as non-new money deals. Criteria for high yield bond transactions can be found in Section 3, 4, and Bank Lending Surveys Data for loan demand and credit standards are sourced from the ECB s bank lending survey. Graph numbers are net percentages of reporting banks Global Comparison High Yield Issuance Data for global high yield issuance are sourced from Dealogic. Asian deals are inclusive of Japan and Australia. 2. Issuance Leveraged Loans Leveraged loan issuance data are sourced primarily from Dealogic and Thomson Reuters LPC. For more details on qualifying criteria, please refer to section Forward Pipeline of Leveraged Loan Market Forward leveraged loan pipeline data are sourced from S&P LCD S&P ELLI Total Institutional Loans Outstanding Total institutional loan outstanding data are sourced from S&P LCD and are outstanding loans in the S&P ELLI index S&P ELLI Ratings Diversification S&P ELLI ratings diversification are the percentages of currently outstanding loans in S&P s ELLI index that are rated accordingly. Data are provided by S&P LCD European Leveraged Loan Ratios European leveraged loan ratios are sourced from Fitch Ratings and are debt/ebitda ratios across Fitch s shadow rated universe. Transactions included in the ratio include new as well as existing transactions and ratings may be assigned at various points in time throughout the year Loan Spreads Loan spread data are sourced from Dealogic under our criteria for leveraged loans (see Section 1). For purposes of loan spread calculations, deals marketed in the US are excluded. Spreads are a weighted average of spread margin on new leveraged issuance on a rolling twelve months basis, and are typically benchmarked to LIBOR or EURIBOR. Institutional loan spread data are inclusive of 2 nd lien; pro rata spreads include all revolvers and term loan A (Tla). 3. Issuance High Yield Bonds Overview High yield bond transactions are sourced primarily from Dealogic, with supplemental information sourced from Bloomberg. High yield transactions are defined as transactions with a Dealogic effective rating of equal or less than BB+, and may include unrated transactions based on issuer and desk notes. Split-junk rated transactions are generally excluded. European issuance, inclusive of both emerging market Europe and developed market Europe, are defined as an issue having a Dealogic deal nationality as well as nationality of risk within Europe issued in the euro, foreign, and global markets; deals marketed locally are excluded. Sovereign, sub-sovereign, and supranational parent issuers are excluded from issuance, as well as ABS/MBS issuers. Emerging market Europe and developed market European issuance are defined by nationality of risk, rather than nationality of deal, and although primarily sourced from Dealogic, are ultimately subject to AFME s discretion. Emerging and developed market issuance are mutually exclusive and will contain no overlap unless otherwise mentioned. European emerging market bonds are further defined with having a minimum deal size of 75. million; deals on the same day from the same issuer are aggregated for the purpose of meeting this minimum. Russian ruble (RUB)-denominated issuance are excluded due to differences in terms and documentation; as of 4Q 1 this criteria no longer applies and may be included on a case by case basis. 17 Q1 212

20 3.2. European HY Issuance by Sponsor Data for high yield issuance by sponsor are sourced from Dealogic. LBO deals are defined as all high yield transactions whose issuer parent is a public or private finance entity (i.e., a financial sponsor), regardless of use of proceeds European Corporate Bonds Outstanding Data for European corporate outstanding are sourced from Bloomberg and AFME/SIFMA estimates. Criteria for European corporate bonds are: bonds must be placed in the domestic, euro, foreign, and global markets with a nationality of issue and risk from a European developed or emerging market country as defined by AFME. Corporate bonds exclude all issuance from banks and financials, and additionally excludes all covered bonds, warrants, deposit notes, receipts, and certificates of deposit. Only EUR-denominated issues are counted in this calculation. To qualify as an investment grade corporate bond, a security must have a minimum of one investment grade rating from Moody s, Standard and Poor s, or Fitch Ratings. Split-rated securities are also included in investment-grade numbers. To qualify as a high yield corporate bond, a security must have a minimum of one sub-investment-grade rating from Moody s, Standard and Poor s, or Fitch Ratings; withdrawn ratings are not counted for purposes of determining high yield. Unless otherwise specified, high yield outstanding totals in discussion commentary will include non-rated securities, regardless of the credit quality of the debt or issuer. Corporate bonds outstanding include certain securities that may be considered corporate securitisations or structured finance securities; while all effort is made to exclude the latter, the former will be counted toward the corporate bonds outstanding total, and will subsequently overlap to some extent to AFME structured finance outstanding numbers European Corporate Bond Issuance by Rating Data for HY issuance by rating are sourced from Dealogic, Bloomberg, and the three rating agencies. The composite rating is determined by the lowest rating assigned by either Moody s, Standard and Poor s, or Fitch Ratings European Corporate Bond Issuance by Tenor Data for HY issuance by tenor are sourced from Dealogic. Other includes perpetuals European HY Issuance By Use of Proceeds Data for HY issuance by use of proceeds are sourced from Dealogic and aggregated for the purposes of this calculation. Please refer to Section 3 for criteria on high yield issue inclusion European HY Issuance, Senior Secured Share Data for HY issuance by seniority are sourced from Dealogic and Bloomberg. Senior Unsecured totals include all bonds that are senior but not senior secured. 4. Issuance European Developed Market High Yield Bonds High yield bond issuance data are sourced from Dealogic. For further criteria on how high yield issuance are defined, please refer to section 3. Developed European issuance are deals predominantly from western Europe and includes deals from Andorra, Austria, Belgium, Bulgaria, Cyprus, Switzerland, Germany, Denmark, Spain, Estonia, Finland, France, Faroe Islands, United Kingdom, Guernsey, Gibraltar, Greenland, Greece, Isle of Man, Ireland, Iceland, Italy, Jersey, Liechtenstein, Luxembourg, Monaco, Malta, Montenegro, Netherlands, Norway, Portugal, San Marino, and Sweden. 5. Issuance European Emerging Market High Yield Bonds High yield bond issuance data are sourced from Dealogic. Criteria for all high yield issuance are found in section 3. Emerging market European issuance deals are predominantly from eastern Europe but will also additionally include Turkey, the Russian Federation, Kazakhstan, Turkmenistan, Uzbekistan, Tajikistan, Azerbaijan, and Kyrgyzstan. Certain sub-investment grade countries are not included in the emerging market total, including, among others, Iceland and Greece. 6. Credit Quality 6.1. European HY Default Rate European HY bond default rates are sourced from S&P and are on a trailing 12 month basis. Europe for the S&P default rate is defined to include Austria, Belgium, Bulgaria, Channel Islands, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland and the United Kingdom. Countries are subject to revision European Loan Default Rate European loan default rates, both mezzanine and senior leveraged loans, are sourced from Fitch Ratings and are on a LTM basis. Adjusted rates for both mezzanine and senior loans are inclusive of Fitch s CC*/C* shadow-rated leveraged credits, whereas unadjusted rates are exclusive of these rated credits European Issuer Rating Actions European issuer upgrades and downgrades are sourced from S&P. The breakdown by emerging market and developed Europe are from AFME s definition of developed and emerging markets and would be, under S&P s guidelines, a combination of both European and EMEA rating actions. Multiple downgrades of a single issuer are counted separately. Rating actions are inclusive of both corporate (both credit and merger-related) as well as sovereign ratings. 18 Q1 212

21 European Issuer Rating Actions by $ Amount Rating actions by US dollar amount, industry, and country are sourced from S&P. Breakdown by emerging market and developed Europe are from AFME s definition of developed and emerging markets and would be, under S&P s guidelines, a combination of both European and EMEA rating actions European Defaults Defaults reported by either Moody s or Standard and Poor s in the European bond markets and loans markets, when available. 7. Cash and Synthetic Loans and Bonds, Cash and Synthetic Data are sourced from Markit and Thomson Reuters LPC. High yield bond cash and synthetic spreads from Markit; European leveraged loan cash bid prices from Thomson Reuters LPC, and European leveraged loans synthetic prices from Markit. 8. Total Return 8.1. European HY Bond Total Return European HY bond total return data are sourced from the Bank of America-Merrill Lynch s Euro High Yield Index (HE). The index tracks the performance of EUR-denominated belowinvestment-grade corporate debt publicly issued in the euro domestic or Eurobond markets. Qualifying securities must have a below-investment-grade rating and an investment-grade rated country of risk. Qualifying securities must have at least one year remaining term to maturity, fixed coupon schedule and minimum amount outstanding of 1 million. Original issue zero coupon bonds, global securities (debt issued simultaneously in the Eurobond and euro domestic markets), 144a securities and pay-in-kind securities, including toggle notes, qualify for inclusion in the index. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-tofloating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. Defaulted, warrant-bearing and euro legacy currency securities are excluded from the index European Leveraged Loan Total Return Total return data are provided by S&P LCD and are total returns from S&P s ELLI index, both ELLI and EUR-denominated ELLI. Total returns for ELLI EUR-denominated data are unavailable for 23 and Asset Class Total Return (Cash Basis) Total returns are sourced from respective index owners and Bank of America-Merrill Lynch s indices. 19 Q1 212

22 Disclaimer The information and opinion commentary in this High Yield and Leveraged Loan Report (Report) was prepared by the leveraged finance division of the Association for Financial Markets in Europe (AFME) and the Securities Industry and Financial Markets Association (SIFMA). AFME and SIFMA believe that the information in the Report, which has been obtained from multiple sources believed to be reliable, is reliable as of the date of publication. In no event, however, does either of AFME and SIFMA make any representation as to the accuracy or completeness of such information. AFME and SIFMA have no obligation to update, modify or amend the information in this Report or to otherwise notify readers if any information in the Report becomes outdated or inaccurate. AFME and SIFMA will make every effort to include updated information as it becomes available and in subsequent reports. As information is collected from multiple sources and estimates by the individual sources may differ from one another, estimates for similar types of data could vary within the Report. 2 Q1 212

23 AFME Gary Simmons, Director SIFMA Kyle Brandon, Managing Director, Director of Research Sharon Sung, Research Analyst